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An inflation gauge closely tracked by the Federal Reserve rose 6.3% in April from a year earlier, just below a four-decade high set in March and the first slowdown since November 2020.
The May 27 report from the Commerce Department added to other recent signs showing that while high inflation continues to cause hardships for millions of households, it finally may be moderating, at least for now.
The report also showed that consumer spending rose by a healthy 0.9% from March to April, outpacing the month-to-month inflation rate for a fourth straight time. The ongoing willingness of the nation’s consumers to keep spending freely despite inflated prices is helping sustain the economy. Yet all that spending is helping keep prices high and could make the Fed’s goal of taming inflation even harder.
On a month-to-month basis, prices rose 0.2% from March to April, down from the 0.9% increase from February to March.
Still, inflation remains painfully high, and it’s inflicting a heavy burden in particular on lower-income households. Surging demand for furniture, appliances and other goods, combined with supply chain snarls, began sending prices surging about a year ago.
Consumers are now increasingly shifting their spending from goods to services, such as airline fares and entertainment tickets. That trend could help cool inflation in the months ahead, though it’s unclear by how much. The cost of such services as restaurant meals, plane tickets and hotel rooms also is rising.
Chair Jerome Powell has pledged to keep ratcheting up the Fed’s key short-term interest rate until inflation is “coming down in a clear and convincing way.” Those rate hikes have spurred fears that the Fed, in its drive to slow borrowing and spending, may push the economy into a recession. That concern has caused sharp drops in stock prices in the past two months, though markets have rallied this week.
Powell has said the Fed is aiming for a “soft or soft-ish” landing, in which wages, consumer spending and growth slow, but the economy avoids a downturn. Most economists say that while such an outcome is plausible, they doubt it can be achieved.
A better-known inflation gauge, the consumer price index, earlier this month also reported a slowing of still-high inflation. The CPI jumped 8.3% in April from a year earlier, down from a 40-year high in March of 8.5%.
Yet rising prices of gas and food will keep measures of inflation painfully high at least into the summer. The national average price of a gallon of gas has reached $4.60, according to AAA. A year ago, it was $3.04.
Other trends, however, suggest that core inflation may continue to slow in the coming months. Retailers have reported rising stockpiles of televisions, patio furniture and other goods for the home as consumers have shifted their spending more toward travel and services-related goods such as luggage and restaurant gift cards.
Those stores will likely have to offer discounts to clear inventory in the coming months. And auto manufacturers have been ramping up production as some supply chain snarls untangle and as they have managed to hire more workers. Both trends could help lower the prices of goods.
At the same time, higher pay for many workers, particularly at restaurants, hotels and warehouses, will keep forcing up prices for services, which, in turn, would at least partly offset the benefit of less-expensive goods.
And most economists forecast that inflation, as measured by the Fed’s preferred gauge, still will be at about 4% or higher by the end of this year. Price increases at that level likely would mean that the Fed still will raise interest rates to lower inflation to its 2% target.
The inflation measure reported May 27, called the personal consumption expenditures price index, differs in some ways from the consumer price index that help explain why it shows a lower inflation level than the CPI does. Rents, which are steadily rising, are given less weight in the PCE than in the CPI.
The PCE price index also seeks to account for changes in how people shop when inflation jumps. In that way, it can capture, for example, any trend in which consumers switch from pricey national brands to cheaper store brands.